Frontier Communications 2006 Annual Report Download - page 8

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Local and Long Distance Services, or CALLS plan, reduced prices for interstate-switched access services and
phased out many of the implicit subsidies in interstate access rates. The CALLS program expired in 2005. The
FCC may address future changes in interstate access charges during 2007 and such changes may adversely affect
our revenues and profitability.
Another goal of the 1996 Act was to remove implicit subsidies from the rates charged by local
telecommunications companies. The CALLS plan addressed this requirement for interstate services. State
legislatures and regulatory agencies are beginning to reduce the implicit subsidies in intrastate rates. The most
common subsidies are in access rates that historically have been priced above their costs to allow basic local rates
to be priced below cost. Legislation has been considered in several states to require regulators to eliminate these
subsidies and implement state universal service programs where necessary to maintain reasonable basic local
rates. However, not all the reductions in access charges would be fully offset. We anticipate additional state
legislative and regulatory pressure to lower intrastate access rates.
Some state legislatures and regulators are also examining the provision of telecommunications services to
previously unserved areas. Since many unserved areas are located in rural markets, we could be required to
expand our service territory into some of these areas.
Recent and Potential Regulatory Developments
Wireline and wireless carriers are required to provide local number portability (LNP). LNP is the ability of
customers to switch from a wireline or wireless carrier to another wireline or wireless carrier without changing
telephone numbers. We are 100% LNP capable in our largest markets and over 99% of our exchanges are LNP
capable. We will upgrade the remaining exchanges in response to bona fide requests as required by FCC
regulations.
In 1994, Congress passed the Communications Assistance for Law Enforcement Act (CALEA) to ensure
that telecommunication networks can meet law enforcement wiretapping needs. Our company was fully
compliant, for all TDM voice services, by June 2006. In June 2006, the FCC issued an order addressing the
assistance capabilities required, pursuant to section 103 of the CALEA law, for facilities-based broadband
Internet access providers and providers of interconnected VOIP. Frontier expects to be fully compliant in 2007 as
required by the order.
The FCC and Congress may address issues involving inter-carrier compensation, the universal service fund
and internet telephony in 2007. The FCC adopted a Further Notice of Proposed Rulemaking (FNPRM)
addressing inter-carrier compensation on February 10, 2005. Some of the proposals being discussed with respect
to inter-carrier compensation, such as “bill and keep” (under which switched access charges would be reduced or
eliminated), could reduce our access revenues and our profitability. The FCC requested additional comments on
intercarrier compensation proposals in late 2006. The universal service fund is under pressure as local exchange
companies lose access lines and more entities, such as wireless companies, seek to receive monies from the fund.
The rules surrounding the eligibility of Competitive Eligible Telecommunication Carriers, such as wireless
companies, to receive universal service funds are expected to be clarified by the Federal-State Joint Board on
Universal Service and the clarification of the rules may heighten the pressures on the fund. In addition the Joint
Board requested comments, on August 8, 2006, on the merits of using reverse auctions to determine the
distribution of high-cost Universal Service support. Changes in the funding or payout rules of the universal
service fund could further reduce our subsidy revenues and our profitability. As discussed in MD&A, our access
and subsidy revenues are important to our cash flows and our access revenues declined in 2006 compared to
2005. Our access and subsidy revenues are both likely to decline in 2007.
The development and growth of internet telephony (also known as VOIP) by cable and other companies
have increased the importance of regulators at both the federal and state levels addressing whether such services
are subject to the same or different regulatory and financial models as traditional telephony. The FCC has
concluded that certain VOIP services are jurisdictionally interstate in nature and are thereby exempt from state
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